No to the Graduate Tax

No to the Graduate Tax

July 15, 2010 2:13 PM

The proposal for a graduate tax announced by Vince Cable today is a truly awful idea for a number of reasons. It is less fair than using fees, a less suitable revenue stream for universities and likely to run into a thicket of complexity if it isn't to be utterly unjust.

The starting point is that students should pay at least a share of the costs of their education. Students benefit from going to university, so that is only fair. Despite the ridiculous rhetoric of some student unions, that isn't an "attack on education" or anything of the sort, it is a recognition of education's value.

So the question is, what is the best way for students to contribute?

Fairness

Under a system of fees, a student decides whether the benefits they expect from higher education - the higher earnings, the satisfaction of learning, the social experience, the broadened horizons, the social status - are worth the price. If it is, then they will pay and go to university. If they can't afford to, then we have set up a system of loans so they can go and pay it back if and when those higher earnings make it possible. That both ensures that the right people go to university, those for whom it is worthwhile, and it is fair. If you think that your degree is worthwhile you can pay for it, if you don't then why should taxpayers foot the bill?

By contrast, under a graduate tax you could well wind up paying a bill that is higher than you expected when you took the course. Years or decades later politicians will decide how much you should be paying to support the students in university then, in yet another public sector Ponzi scheme, instead of you paying a clear amount for your own course. Depending on how it is implemented, it is easy to imagine that even someone my age - who paid tuition fees - could wind up paying the graduate tax as well. It is much fairer for people to pay for their own education.

An argument that really angers me is that fees stop poor students going to university. With the funding arrangements in place, they shouldn't. But they might for two reasons.

First, there are a lot of cynical politicians on the left of the Labour Party and in organisations like the National Union of Students (NUS) scaremongering about the levels of debt students leave university with. They play up the figures and conflate student debts with regular debts, where you have to pay regardless of earnings and face much higher levels of debt. So it isn't the reality that puts poor students off, but the distortions peddled by those claiming to be looking out for their interests.

Second, a lot of students can't get enough student loans and are therefore forced onto much more expensive sources of finance like personal loans and credit cards. The amount of student debt has to be limited because of the artificially low rate of interest. If we charged the Government's cost of borrowing on the debt (still much, much lower than the rate you'll get from a bank or credit card) then the amount on offer could go up and there would be less of a block to poor students attending to university. But try selling that to the NUS.

In both cases, the people who claim to be working so poor students can go to university are actually making it harder for them.

Suitable revenue stream

When universities are funded by the Government they are dependent on the whims and wherewithal of politicians. That means their resources often fail to track student numbers. Fees were introduced because there had been a substantial increase in the number of students and universities needed greater funding to match that and improve standards. Right now politicians need to cut funding for universities because of wider pressures on the public finances. To the extent money comes from fees, university income will only decline if they are no longer able to attract as many students at a given price.

Given that they interrupt research and otherwise get in the way, there
is always a temptation for academics to view students as an interruption
in their real work. What is great about a fees based system is that it encourages universities to treat students as valued customers rather than unwelcome guests. It allows us to get away from the language of rationing, where the Conservatives found themselves in the sad and unnecessary position of attacking the idea of more people going to university. And if students pay their own way then they can study whatever wacky nonsense takes their fancy without it becoming an issue for the TaxPayers' Alliance.

The practicalities

How exactly is Vince Cable planning to make this work?

It could be very simple. You just tack a few percentage points on the rate someone pays in income tax if they are a graduate. But that would have a number of problems:

It could lose money. Independent forecasters think the income tax hike to 50 per cent will reduce revenue, what will a further hike to - say - 53 per cent do?

People could easily wind up paying more in graduate fees than their course cost. People who have already paid tuition fees could pay the graduate tax. There are a number of ways in which separating the amount people pay from the course they undertake could yield unfair results.

It doesn't differentiate between different courses, that may be more or less valuable. Not all degrees are the same and charging a lower or higher price is one way that universities can reflect that. Take that away and you will wind up with people taking the wrong courses.

Try to fix those sorts of issues and the scheme will quickly get very ugly and complicated. The politicians will start to wonder why they messed with the much more sensible scheme we have today.

The proposal for a graduate tax announced by Vince Cable today is a truly awful idea for a number of reasons. It is less fair than using fees, a less suitable revenue stream for universities and likely to run into a thicket of complexity if it isn't to be utterly unjust.

The starting point is that students should pay at least a share of the costs of their education. Students benefit from going to university, so that is only fair. Despite the ridiculous rhetoric of some student unions, that isn't an "attack on education" or anything of the sort, it is a recognition of education's value.

So the question is, what is the best way for students to contribute?

Fairness

Under a system of fees, a student decides whether the benefits they expect from higher education - the higher earnings, the satisfaction of learning, the social experience, the broadened horizons, the social status - are worth the price. If it is, then they will pay and go to university. If they can't afford to, then we have set up a system of loans so they can go and pay it back if and when those higher earnings make it possible. That both ensures that the right people go to university, those for whom it is worthwhile, and it is fair. If you think that your degree is worthwhile you can pay for it, if you don't then why should taxpayers foot the bill?

By contrast, under a graduate tax you could well wind up paying a bill that is higher than you expected when you took the course. Years or decades later politicians will decide how much you should be paying to support the students in university then, in yet another public sector Ponzi scheme, instead of you paying a clear amount for your own course. Depending on how it is implemented, it is easy to imagine that even someone my age - who paid tuition fees - could wind up paying the graduate tax as well. It is much fairer for people to pay for their own education.

An argument that really angers me is that fees stop poor students going to university. With the funding arrangements in place, they shouldn't. But they might for two reasons.

First, there are a lot of cynical politicians on the left of the Labour Party and in organisations like the National Union of Students (NUS) scaremongering about the levels of debt students leave university with. They play up the figures and conflate student debts with regular debts, where you have to pay regardless of earnings and face much higher levels of debt. So it isn't the reality that puts poor students off, but the distortions peddled by those claiming to be looking out for their interests.

Second, a lot of students can't get enough student loans and are therefore forced onto much more expensive sources of finance like personal loans and credit cards. The amount of student debt has to be limited because of the artificially low rate of interest. If we charged the Government's cost of borrowing on the debt (still much, much lower than the rate you'll get from a bank or credit card) then the amount on offer could go up and there would be less of a block to poor students attending to university. But try selling that to the NUS.

In both cases, the people who claim to be working so poor students can go to university are actually making it harder for them.

Suitable revenue stream

When universities are funded by the Government they are dependent on the whims and wherewithal of politicians. That means their resources often fail to track student numbers. Fees were introduced because there had been a substantial increase in the number of students and universities needed greater funding to match that and improve standards. Right now politicians need to cut funding for universities because of wider pressures on the public finances. To the extent money comes from fees, university income will only decline if they are no longer able to attract as many students at a given price.

Given that they interrupt research and otherwise get in the way, there
is always a temptation for academics to view students as an interruption
in their real work. What is great about a fees based system is that it encourages universities to treat students as valued customers rather than unwelcome guests. It allows us to get away from the language of rationing, where the Conservatives found themselves in the sad and unnecessary position of attacking the idea of more people going to university. And if students pay their own way then they can study whatever wacky nonsense takes their fancy without it becoming an issue for the TaxPayers' Alliance.

The practicalities

How exactly is Vince Cable planning to make this work?

It could be very simple. You just tack a few percentage points on the rate someone pays in income tax if they are a graduate. But that would have a number of problems:

It could lose money. Independent forecasters think the income tax hike to 50 per cent will reduce revenue, what will a further hike to - say - 53 per cent do?

People could easily wind up paying more in graduate fees than their course cost. People who have already paid tuition fees could pay the graduate tax. There are a number of ways in which separating the amount people pay from the course they undertake could yield unfair results.

It doesn't differentiate between different courses, that may be more or less valuable. Not all degrees are the same and charging a lower or higher price is one way that universities can reflect that. Take that away and you will wind up with people taking the wrong courses.

Try to fix those sorts of issues and the scheme will quickly get very ugly and complicated. The politicians will start to wonder why they messed with the much more sensible scheme we have today.

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Welcome to The TaxPayers' Alliance, Britain's grassroots campaigning group dedicated to reforming taxes, cutting spending and protecting taxpayers. If you like what we do, become a supporter now by signing up to our mailing list using the form below. John O'Connell, Chief Executive